Grady Buchanan is a Partner at NVNG Investment Advisors, a fund-of-funds dedicated to advancing startup communities throughout the Midwest by investing in venture firms looking to deploy capital in the region. NVNG employs a unique fund strategy by using their fund (consisting primarily of corporate LPs) and their connections to attract venture firms to the Wisconsin ecosystem. Before co-founding NVNG Investment Advisors, Grady worked as Senior Investment Analyst and the Wisconsin Alumni Research Foundation, where he managed the sourcing and vetting of venture capital funds for the foundation’s portfolio. Grady holds a B.S. in Economics from the University of Wisconsin-Madison.
You can find Grady on Twitter and on LinkedIn.
KEY THEMES:
Fund Strategy
As a fund-of-funds, NVNG’s competitive advantage is their LP base — Corporations. NVNG is able to connect their corporate LPs with the venture funds within their own portfolio.
Venture fund managers want to establish relationships with larger corporations who can act as potential corporate partners, later-stage investors, and acquirers to their portfolio companies.
Corporations want access to venture firms as a way of outsourcing R&D to startup companies that are solving problems faced by their own customer base.
"Our 'product' is essentially the opportunity for those corporations to funnel their innovation dollars into another vehicle."
NVNG’s biggest hurdle when employing this new approach was education — Teaching corporations how to invest in the venture capital vehicle that would then directly invest in startup companies.
Startup ecosystems
To attract outside investment and grow a startup ecosystem, you need to connect the builders with the capital that's outside the market.
Local investors know their own geography very well, and they’re the people best-suited to attract outside capital. They know and understand all of the stakeholders.
Communication and exposure to deal flow are the two most important catalysts to the formation of a robust startup community.
"One of the most important patterns we’ve noticed recently is the fact that the vast majority of the funds in Wisconsin are focused on early-stage investing.”
There are very few Wisconsin funds that are large enough to write Series B checks and later. As a result, startups at those stages must seek capital outside of the state.
The job of an LP
Competition between fund managers in Wisconsin is great for a fund LP, because it fosters innovative practices and allows funds-of-funds to pick the winners.
"What I look at most when evaluating a brand new fund is how well a manager is connected and where they came from."
Larger LPs have "opportunistic allocation" that they can use to invest in smaller funds. The idea is to invest a smaller check upfront and then gradually increase the investment with subsequent funds as the venture firm continues to grow. This de-risks investments in new managers.
When evaluating fund managers at new funds, Grady prioritizes access: Is the firm well-connected to downstream capital and resources?
When evaluating fund managers at more established funds, Grady prioritizes legacy: What is this fund’s track record? How likely are the managers to remain with the firm for the entire life of the fund?
“With the venture timeline, a firm’s organizational structure can be just as important as the performance of their investments.”
RECURRING THEMES:
According to Grady, a large number of venture firms with differing methods, opinions and perspectives is good for a fund-of-funds. This allows an LP to diversify their own portfolio by investing in specialized venture funds with a more narrow industry and stage focus.
Richard Deulofeut expressed a similar idea when explaining Trust Ventures’ fund thesis. A narrow investment focus and a specific value proposition (like the one at Trust Ventures) can be hugely beneficial to a startup that aligns with that thesis. However, it can also make that fund more attractive to Limited Partners. The LP is able to more effectively distribute their own risk by investing in themes and industries that have a low correlation to each other.
This method is also consistent with how large fund managers (endowments, retirement funds, pension funds, etc.) diversify their own portfolios in the public markets.
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How did you get involved in private market investing?
After I graduated college with a degree in Economics, I moved to Milwaukee to work at a bank. I had realized that if I wanted to get into investing, I needed to learn about the actual companies I would be investing in.
So, I went into a treasury management position where we would travel around the state of Wisconsin and work with accounting teams and their treasury management departments to see how we could help them better utilize the services we were providing. So it was a strictly sales role, which became repetitive after a few years. But, it was very interesting to see how those companies were operating. After doing that, I felt like I was ready for the next step. So I moved down to Chicago and got a job at Northern Trust and I learned how to interact with institutional investors. I worked with many clients in completing investment risk and analytical services, and one of those clients was the Wisconsin Alumni Research Foundation. They’re an affiliate technology transfer arm to the University of Wisconsin Madison. This foundation had an eight-person investment team managing a $3 billion endowment portfolio. So they were similar to other university endowments in size, but they had a different strategy. What interested me was the fact that they had large portions of the fund allocated to both hedge funds and venture funds. So, although it took a couple years to figure out what I wanted to do, I ultimately ended up taking a job with them back in Madison.
Did the WARF have its own team dedicated to venture fund investing?
Not at the time. We were institutional investors with a longer-term focus that operated like many other foundations. So, I knew a little bit about the tech transfer side. Part of that has to do with the fact that university research and startup funding can marry really well. You might have a professor or a student with a startup and they would ask the investment team to analyze the company and help with diligence.
About four years after I joined, they hired a Chief Venture Officer that was separate from the investment team. The separation of the offices wasn’t because we didn’t like direct investments, but rather it wasn't our core focus as a long-term investor allocating much larger amounts to venture funds themselves.
How did you make that transition from the WARF to NVNG?
So, the individual that I now work with at NVNG was the Chief Investment Officer at the Wisconsin Alumni Research Foundation, Carrie Thome. After she left, we would often find ourselves talking about how to best use our skill sets to contribute to the innovation occurring in Wisconsin. We were watching Cintrifuse succeed in Ohio and Renaissance succeed in Michigan and HX succeed in Texas. Carrie and I were thinking about how we could marry that with what we had been doing as LPs on the fund side. We had a lot of connections through the fund, and Carrie had been investing in venture capital firms and private equity firms for over 20 years. So we thought, “Why don't we leverage some of those connections, create something, and then ask corporations and local Wisconsin investors to invest alongside us?” It would give them a place to put their money while also attracting more venture capital investment to Wisconsin.
And that was something that allowed Carrie and I (along with our third Founding Partner, Linda Leikness) to best utilize both of our skill sets to achieve that goal of contributing to the growth of the Wisconsin startup ecosystem. We had a great team, it was something that had been done in other states, and the timing made a lot of sense. And, we decided last year to make the idea a reality. Unfortunately, COVID hit soon after. But honestly, vintage year funds look great in recessionary environments and times of uncertainty. So it’s not the worst case scenario, but it had delayed our fundraising a bit.
How has your investment thesis played out over time? Have there been any new insights?
We were close in our original thinking. Obviously we were very optimistic about what we thought would be best for the Wisconsin startup ecosystem. Because as investors, we always know best [laughs]. At the end of the day, though, we don’t know everything. So NVNG was very similar to a startup because we’re essentially creating a product. We needed to go out, get feedback, and find out whether we’re building something that actually solves a problem. And it turns out there’s a pretty decent appetite for our “product.” You can just look at the number of corporations that have developed their own corporate venture capital offices or the number of smaller corporations that have their own innovation departments. So, we looked at the landscape and learned that there are many more corporate investment arms than we expected in the state of Wisconsin. We immediately learned that most of our original efforts had to start with a focus on education — How to invest in the venture capital vehicle that then invests directly into startups, rather than going out and sourcing deal flow or vetting funds on your own. Corporate venture capital offices are out there trying to find startup companies that are solving the real-world problems faced by their own customers. It’s self-serving, but in the end it benefits the corporation, the startups, and the customer.
And a lot of those corporations end up giving back to entrepreneurial ecosystems. Many of the ones in the state of Wisconsin are really good at that. Our fund “product” is essentially the opportunity for those corporations to funnel their innovation dollars into another vehicle. So far, there’s been a real appetite and I’m very optimistic that this model will work in Wisconsin.
How do you think your position as a fund-of-funds allocator gives you a unique perspective of the private markets?
I think that venture investors are all very different. They all have their own viewpoints and their own proprietary methods of sourcing deals. From the perspective of a limited partner, this is great. We have the luxury of hearing everyone’s theses and methods, and then we get to invest in the funds who align with our outlook and our goals. I think what made us unique at WARF was that we could get in front of many of the best venture funds. Although Wisconsin doesn’t have as much to offer when you compare us to the coasts, we do have unique industries that attract venture dollars from outside the state; especially in the BioTech and life sciences spaces. Plus, there are a lot of research dollars that go to these large Midwestern university campuses. So that makes us more attractive and allows us to connect with funds that other LPs in smaller markets might not have access to.
At NVNG, we believe that our competitive advantage is the fact that our own limited partner base consists of large corporations and in-state investors. This, coupled with the fact that we’re in the state of Wisconsin, makes us very attractive to venture funds looking for limited partners of their own. We’re able to connect our corporate partners to venture firms across the country that want to learn more about the Midwest ecosystem. At the end of the day, these venture firms want to be able to connect portfolio companies with corporations or larger investors in pursuit of partnerships, additional funding, or strategic deals. We’re hoping that our limited partner base can make us a more unique limited partner to venture funds.
Have you found a growing interest in Wisconsin from these funds?
They all say that the Midwest looks great, up and coming, has all the right ingredients, etc. As an LP, you have to understand the difference between who’s telling you what you want to hear and who’s genuinely interested in the market.
But, I hear a lot from investors on the coasts that are looking inward and I hear a lot from the emerging managers throughout the Midwest and from new funds that are popping up all the time. The notion that there’s all this capital flooding into the Midwest has become very apparent, given the large number of firms that have opened shop here over the past several years. And I think we’re nowhere near a point of saturation on deal flow. The Midwest has not reached a point where the cost of living has truly started to inflate. Just like in the Rockies region, a founder can build their company in a different city while also reducing burn and extending their runway. And that’s partly why venture funds are flocking here, among other reasons. So, while we haven’t seen too many investments from out-of-state at NVNG, we’re starting to see more of it. It’s definitely a positive.
How do you attract more investment from outside the state?
I think you need to showcase what's currently happening in the state. I know that's a pretty broad statement, but I believe you need to connect the builders (the ones that are actually doing something) in an ecosystem to the capital that’s outside that market. If a Colorado venture firm were to come to Wisconsin, I would want them to speak with the investors and their limited partners within the state. I believe that allows them to get to know the ecosystem and the builders within it, rather than trying to hunt down a company they found on Crunchbase that had recently raised a round. From the perspective of an LP, we know about the ecosystem and the funding landscape because we have the benefit of speaking to everybody at each level. We get to see those trends. And, the startup companies typically know only what’s in their immediate network. But it’s the direct investors that cover this specific geography who know it the best; whether that be high-net-worth individuals, family offices, angel groups, or early-stage venture firms. Those are the people that I want interacting with out-of-state investors. And, selfishly, I want the investors here to be able to showcase to those investors what they have to offer and what the state of Wisconsin has to offer. It’s much better to facilitate these connections now, rather than waiting for a successful startup to pop up. Of course, any Wisconsin startup success is great; but, exposure after the fact is equally important when strengthening the reputation of an ecosystem. I want people to know about what’s going on now so you can see the future that’s ahead of us.
Given your vantage point as a fund-of-funds, what trends have you noticed?
Recently, I think we've seen an influx of capital into the Midwest. There are a lot of additional funds of funds that are already investing in emerging venture fund managers throughout the region. Obviously NVNG plans to do the same, but there are just so many new managers, which is actually great. It allows us to sort through and invest in the managers that we believe will do well in the coming years. I’m a big fan of the competition between these managers, because I think it makes everybody better and more innovative. However one of the most important patterns we’ve noticed recently is the fact that the vast majority of the funds in our home state of Wisconsin are focused on early-stage investing. There are very few Wisconsin venture funds that are able to write a check large enough to participate in a Series B (or later) round. So, for the time being, startups that are looking to raise larger rounds are still looking elsewhere.
Another trend we’ve noticed is the fact that many of the emerging managers in Wisconsin have actually spun out of a previous venture firm and started their own fund. So, while they might be newer to the game, they already have their own track records with previous investment experience. That’s what we’re seeing from many of the new funds in the Midwest. Of course, those newer funds are smaller for the most part. The ecosystem is just getting started. But it'll be interesting to see how these firms and these managers evolve once the funds grow from $5 million to $30 to $70 and onward. I’m excited for the day that we have some real late-stage capital here in the Midwest.
As an LP, do you have a preference for a specific type of fund manager?
[It has been reported that, on average, first time fund managers actually slightly outperform more established funds.]
I don't think we have a hardened preference based on previous returns. A good track record is great to have, but emerging managers don’t necessarily have previous returns to point to. However, that doesn't mean those managers are going to perform poorly. It also doesn't mean they're going to be great. What I look at most when evaluating a brand new fund is how well a manager is connected and where they came from. So, Matchstick Ventures is a great example of this. They connect the mountain states to the Midwest by leveraging the TechStars network for early-stage deal flow, and venture firms like the Foundry Group for later-stage and follow-on investment. On top of all of that, they’re well connected in the Midwest. So, even though Ryan and Natty [Partners at Matchstick Ventures] are new managers, I’m looking at their fund the same way a venture investor might evaluate a startup — evaluating their connections, their traction, their dependencies, etc. Ryan and Natty don’t have any dependencies, they’re very well connected, and they have a vast pool of early-stage companies to select from (all of which are coming from some of the top accelerators from across the country). To me, that team looks pretty attractive from the perspective of an institutional investor.
But also I think the other thing to remember is that, at the institutional level, we often have size mandates and check ranges that we need to abide by. So, when looking at a small venture group or a new manager, we’ll have what we call “opportunistic allocations” for those emerging managers. In those cases, we might write smaller checks to get our foot in the door, rather than buying into 30% of a new manager’s first fund. And by taking a smaller position in these initial funds, we mitigate some of our own risk while remaining open to the possibility of scaling up our investment in subsequent funds.
What do you look for when analyzing a fund manager? What makes for a great Limited Partnership opportunity?
Well, I think some of the most important questions we ask include, “What does their track record look like?”, “How long has the firm been around?”, “How long has that team worked together?”, and “Do they know how to scale their own firm efficiently?” With the venture timeline, a firm’s organizational structure can be just as important as the performance of their investments. We don’t want to see managing partners leave with every fund. One of the most important questions is, “Does this team make sense for what they are investing in?” So I look at the team’s background and I look at how they’ve performed within their industries as a team. You know, a lot of teams will spin out of very large organizations and create their own venture firms in part because they work so well together. So a great example is Carrie and I with NVNG, we spun out of a larger team [WARF]. We’re friends, we’re co-workers, and we see the world in a very similar way. And that’s what I look for in Managing Partners and on the Director level for venture funds.
From there, you begin to evaluate the person’s track record and how they invest. And those things should really speak for themselves. During later diligence, you talk about where they’re sourcing their deals, how their deals are structured, etc. Then it’s up to us to determine if the financings makes sense, if the fund’s strategy is sustainable in the long run, and if they’re likely to deviate from their initial strategy.
It’s our job to hire venture capital firms to see the future, and that’s what VCs are paid to do. And they have to report back to us. So I don’t envy their roles in any way. I know that it’s a very tough job. Our job as fund pickers is slightly easier, but it is a long-term investment decision and one that’s handled with care and respect to our own investors. Funds last anywhere from 5-10+ years. So, we’re looking for good teams, good partners. Especially here in Wisconsin. More altruistically, we want venture funds that are willing to look at potential investments in Wisconsin. That’s a very specific objective for us. But more loosely, if we’re just looking at venture capital funds, I look at how well they’re connected to downstream capital and additional resources. Especially if they’re a newer fund. If they’re a more established fund, I look at their track record and try to ensure that the partners are going to stick around and/or that they have longevity plans. And of course how they’re sourcing deals and where they’re coming from. Because if they’re all coming from some secret place that they can’t share, that’s great, but that doesn’t work for us. We can always find a venture firm that’s willing to be more transparent with us. So transparency is also a big thing for us and a requirement for NVNG.
To what extent does a specific fund thesis play into your decision making process?
Purposefully, we have no specific industry vertical mandates. With that being said, a portfolio can certainly lean towards one specific industry. For example, at WARF, our portfolio largely favored life sciences and BioTech simply because of the types of companies that were being spun out of our campus. That tilt was simply based on our physical location and our mandate to contribute to the greater Wisconsin startup community.
At NVNG, we want to build a portfolio based on a long-term investment strategy that best supports the corporations and local investors that serve as our LPs. That means investing across industries and across stages into venture funds that are investing in the industries and the categories that Wisconsin has to offer. And, since those funds are investing across all stages, we’re able to connect those funds to deal flow and capital that’s both upstream and downstream. For example, this allows us to connect an early-stage fund manager in Milwaukee with a growth-stage firm in Ohio. Portfolio-wise we’re really looking to first diversify by industry, then diversify by stage. And, if one industry is performing particularly well, we also have the autonomy to adjust our portfolio distribution as needed.
How has the startup ecosystem in Wisconsin evolved over the past several years?
I think it's growing quite substantially. I've been here almost five years now since I moved back after graduating. When I left Wisconsin, we didn't have the same number of venture funds. We've probably doubled that over the past five years. We have a number of state initiatives that are locally-focused, one of which is called the Badger Fund of Funds. This organization is run by several venture fund managers from across the state and their first fund has a mandate to invest solely in Wisconsin-based companies. It’s a great way to bring more capital to the state.
When I first moved back to Wisconsin, we didn't have a very robust startup ecosystem. In many ways, Madison now looks a lot like many of the larger startup communities across the country. The StartingBlock building, for example, has been crucial to the growth of Madison’s startup ecosystem. It was built close to UW’s campus and it is housing startups, it is housing venture firms, and it is even housing the Gener8tor accelerator. Interestingly, in 2019 Microsoft and the Green Bay Packers collaborated to form their own venture fund called TitletownTech to invest in early-stage companies across the US. And, while the Wisconsin startup ecosystem had been growing slowly since the early 2000s, we've only recently seen this uptick over the last couple of years. I mean, we definitely have a lot of work to do, but it's great to see how far we’ve come.
What do you believe are the most important catalysts to the development of a startup community?
Communication and exposure are the two most important catalysts to the formation of a robust startup community. It’s common in every geography for angel and venture funds to share information and to share deal flow. And, while every city will have the few investors that are great at sourcing deals, it’s important to consider how the rest of the ecosystem can get exposure to and learn about those deals. Of course, there are always meetings, forums, and events that allow investors and entrepreneurs alike to meet and collaborate, but it can be a very inefficient means of sharing information and deal flow because it requires diligent follow ups.
One of the things that I’ve noticed within Wisconsin is that even the communities within Madison and Milwaukee are pretty confined. Deal flow and venture dollars don’t move between those two cities as much as they could. And, there’s a reason for that sort of isolation. They do very different things. Madison is a university town and there’s a lot of activity in the life science, BioTech, and computer science sectors. And, Milwaukee is very different. As a city within the rust belt, much of the local deal flow is centered on manufacturing, logistics, clean technologies, and sometimes retail. So, in many ways the Wisconsin ecosystem is bifurcated. And, the question we often ask ourselves is, “How do you bring these independent communities together in a way that maximizes the sharing of information and increases the exposure of all parties involved?”
Where do you see the venture industry 10 years from now?
I'll preface it by saying I have no idea. I'll also repeat the cliche, “it depends.”
It’s hard to answer this question, because I’m still not sure if I believe myself or not. But, from what I’ve observed, there are a lot of people working to make the private markets more accessible and more transparent. By accomplishing this, it allows people to share more information, which then makes those private markets slightly more accessible. And, (disregarding the technical definitions of “public” and “private”) if you have a startup company that can actually trade its equity value among investors in a more transparent market, then valuations become more accurate and well known.
Even if the private markets eventually become more liquid and more transparent, I do think venture capital firms will still be needed. It’s important to note that they provide a lot more than just capital to a startup company. They provide connections, mentorship, and advice that can be invaluable to early-stage founders. So, I believe that we’ll eventually see venture firms providing capital through primary offerings, which will then allow for startup equity to be traded in secondary markets without the company having to go public.
What are you excited about at the moment?
I believe that the coasts will always be the epicenters for startup and venture activity. Places like New York and San Francisco are always going to be powerhouses and, if you’re starting a company, those aren’t bad places to be. But, I do think the coasts are going to become a little less relevant in time. I think that the rest of the world is beginning to realize that as well. If you look at the size of the Midwest’s economy, it's larger than Brazil's, it's larger than Russia’s and it's larger than India's.
Personally, I think the Midwest is a very attractive place to start a company. There’s a large customer base, there are dozens of Fortune 500 companies with headquarters here, and a founder can drastically reduce burn by building their company in a place with a lower cost of living. Then, the only reason for a founder to travel to San Francisco would be to raise a larger round of capital. And, even then, a founder now has an increasing list of options when looking to fundraise. There are countless emerging venture funds that are popping up right here in the Midwest. There are also a lot of corporations that are now playing in innovation and looking at early-stage companies as potential partners, customers, and acquisition targets.
So I'm obviously very excited about the Midwest’s trajectory and opportunity set. With that being said, I’m remaining pragmatic and cautiously optimistic. It’s unlikely that the Midwest will produce the largest venture returns in the country. The unicorn hubs are still on the coasts. But, we’ve had a few unicorns and we’re starting to grow here. Eventually, I think we’ll see Midwest become its own epicenter. Chicago, Minneapolis, Pittsburgh are already becoming some to watch. Look at Boulder and Denver. You have these little pockets of innovation all over the country that are becoming really significant. And, at some point, entrepreneurs are no longer going to need to travel to Silicon Valley to start a company. That is and will continue to become a thing of the past.
Where can entrepreneurs learn more about the relationship between venture firms and their own LPs?
Given how private the LP/GP relationship is, especially when you add legally binding contracts to that relationship, it’s difficult to find any concrete information about how those partnerships work. I think the best way to learn more about that relationship is to simply to speak with everyone. A General Partner at a venture capital firm can tell you about their own relationship with their firm’s Limited Partners. And, a Limited Partner (like myself) can tell you about their relationships with the venture firms in their portfolio. Unfortunately, I don't think there are any good materials out there that detail the GP/LP relationship from a personal perspective. Of course, you can always read about the financial and contractual nature of the relationship — the economics, the governance, the finances. But if you want to understand the actual inner workings, you just need to go out and talk to both sides. We do like to talk about what we do [laughs].